A Foreseeable Accident Three Years Ago... "We Didn't Get Our Deposits Back": Social Housing Becomes a Ticking Time Bomb [Why&Next]

Land Lease Social Housing Left Unprotected by Guarantee Insurance
Seven Cases of Deposit Non-Return at Concerto Jangwi and Arts Stay Seongsan
City to Prioritize Repayment and Take Over Direct Management
Guarantee Insurance Unavailable Due t

The incident involving the non-return of deposits for 'land lease social housing,' which was provisionally resolved on the 26th by the Seoul Metropolitan Government and the Seoul Housing & Communities Corporation (SH Corporation) through the advance payment of deposits, has been confirmed as a foreseeable accident. The restructuring plan established by the city three years ago included a warning that "protection of deposits is vulnerable and countermeasures are needed," but neither the city nor SH Corporation took action. As a result, it took a year to resolve this predictable situation.

At the beginning of the year, the city formed a consultative body and last month instructed SH Corporation to commit to purchasing the properties. SH Corporation, preoccupied with legal reviews, took another month. Critics argue that if the foreseeable situation had been prepared for in advance, the damage to young people and newlyweds could have been reduced. A bigger problem is that the current atmosphere suggests this incident will be wrapped up with only a temporary fix. Since the city, SH Corporation, and the Housing & Urban Guarantee Corporation (HUG) have not adjusted the requirements for guarantee insurance enrollment, a second non-return of deposits could occur at any time.

Land Lease Social Housing: A Blind Spot in Guarantee Insurance

According to Choi Gichan, a member of the Seoul Metropolitan Council, as of August 28, there have been seven cases of non-returned jeonse deposits at Concerto Jangwi and Arts Stay Seongsan, both operated as land lease social housing since 2021. Among these, one household in Jangwi-dong was put up for auction in August last year. The city has announced that, starting in October, it will give priority repayment to the seven affected households that have not received their deposits and will then exercise its right of indemnity to recover the losses. The city also stated that contracts with affected operators will be immediately terminated and SH Corporation will directly manage the properties.

Social housing was designed to provide homes to young people and newlyweds at prices lower than the market rate. SH Corporation leases land to social enterprises and cooperatives at low rates and supports construction loans, allowing the houses to be rented out at a deposit of 80% or less of the market price. However, a fundamental limitation is that guarantee insurance cannot be obtained because the landowner (SH Corporation) and the building owner (private operator) are different entities. As of August, 13 out of 14 projects are not covered by guarantee insurance. In particular, most private operators have weak financial health, and the low rent makes it difficult to ensure profitability.

Foreseen Three Years Ago... Inadequate Action

The city foresaw such an incident three years ago. When it suspended new social housing projects at the time, the 'Social Housing Restructuring Plan' pointed out that such problems could arise. The plan identified low guarantee insurance enrollment rates and the poor financial health of operators, making it difficult to secure capital and causing project delays, as issues. To address these, it proposed alternatives such as transferring direct management to SH Corporation or selling to private entities, removing problematic operators, and strengthening oversight and supervision of operations.

Councilman Choi stated, "In 2022, I pointed out the issue of non-enrollment in guarantee insurance, and the restructuring plan also mentioned the vulnerability in deposit protection, emphasizing the need for preparation. Despite having enough time to prepare countermeasures, the response was inadequate, and additional budget input from SH Corporation seems inevitable in the process of securing property purchases."

Concerto Jangwi exterior view. Screenshot from Ddokkaebi Housing website.

SH Corporation Focused on Avoiding Breach of Duty Charges

In particular, SH Corporation did not take active measures, concerned that following the city’s instructions could lead to charges of breach of duty. The concern arises from the gap between the business requirements for social housing and the requirements for guarantee insurance. The contract between SH Corporation and private operators states that if the contract is terminated due to the operator's fault, SH Corporation can purchase the building at 40-70% of the appraised value. However, HUG, which oversees guarantee insurance, requires a commitment from SH Corporation, as the landowner, to purchase the operator's building at 100% of the appraised value. This means that guarantee insurance can only be obtained if SH Corporation agrees to buy the building at a higher price than stipulated in the contract with the operator. From SH Corporation's perspective, this could be seen as preferential treatment and raises legal concerns.

In May, SH Corporation asked the Ministry of the Interior and Safety whether the purchase commitment would violate the 'debt guarantee contract restriction' under the Local Public Enterprises Act, and received an authoritative interpretation that there was no violation. Two months later, when the city instructed the preparation of 'protection measures for social housing residents' to resolve the non-return issue, SH Corporation again conducted legal reviews. At that time, the city instructed that the condition to purchase at 40-70% of the appraised value would not apply. SH Corporation then consulted three law firms on whether this would constitute a breach of duty, but received conflicting opinions. Unable to make a decision and facing growing public criticism and audit concerns, SH Corporation even requested pre-consulting from the Seoul Audit Committee. The reviews that should have been conducted at the start of the social housing program were only carried out over the past month. An SH Corporation official stated, "For problematic projects, we are considering terminating the land lease contract and resolving mortgages, provisional seizures, etc., before purchasing the building."

No Consensus on Easing Guarantee Insurance Requirements

The city appears to be wrapping up the situation by having SH Corporation advance tenants' deposits on behalf of the operators. However, a second non-return of deposits could occur at any time. About half of the projects where deposit non-returns occurred are approaching the end of their contracts. In the case of Concerto Jangwi, 9 out of 20 households, and at Arts Stay Seongsan, 4 out of 9 households are in this situation. If tenants whose contracts are ending decide to move out, the amount of deposits the city must advance will increase further. The operators of these social housing projects are not enrolled in guarantee insurance. Many other social housing operators are also in circumstances that make it difficult to obtain guarantee insurance. To enroll, the debt ratio must be 90% or less.

It is also difficult to lower the requirements for guarantee insurance enrollment. The city discussed easing the requirements several times with the Ministry of Land, Infrastructure and Transport and HUG, but was unable to reach an agreement. A city official said, "We have managed to put out the immediate fire by establishing a policy to terminate contracts for problematic projects, purchase the properties, and assume the debt, but there are concerns that additional non-return issues could arise due to the ongoing financial instability of social housing operators."